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Saudi's Missing Barrels of Oil Production

Julian Darley

© Copyright 2004, From The Wilderness Publications, All Rights Reserved. This story may NOT be posted on any Internet web site without express written permission. Contact May be circulated, distributed or transmitted for non-profit purposes only.

[World oil supply has almost certainly peaked, but the mass acknowledgement of its imminent effects has not happened yet. So, in the eyes of the business sectors and the American public, Peak Oil isn't really here yet. The price of crude has never been higher; but Peak Oil isn't really here yet. Shell Oil has recently been convulsing over a series of dishonest overstatements about its oil holdings, but Peak Oil isn't really here yet. Saudi Arabia is in damage-control P.R. mode, reasserting its indemonstrable claims of abundance with an increasingly hysterical intensity; but any shortfall in Saudi production is due solely to recent terrorist attacks. So rest assured, convenient inconveniences like the Khobar blast will soon be out of the way, and the good old days will be back…

Clearly, deception is much easier when the audience is in denial. To quote the little message in the rear-view: "objects in mirror are closer than they appear."--JAH]


June 2 , 2004 0950 PDT (FTW) -- Washington, DC. The world now knows all too well that there were no weapons of mass destruction in Iraq as claimed by Bush and Blair. What was required was a cover story, in this case to make war. It is an old story. Humans have been practicing deception (and war) since history began, and if chimps are anything to go by, most likely well before that. The real question appears to be whether one gets caught or not. If one were to be charitable towards the war-mongers-in-chief, even though they show no signs of charity towards the Iraqis or anyone else (except their big business patrons and puppet-masters), one might say that they really thought that if they looked hard enough, for long enough, they might find something nasty in the wood shed. But so far they haven’t, and short of planting some WMD, it seems unlikely that they will.

Next door, in Saudi Arabia, they are also desperate to find something they have promised the world, namely a few hundred billion barrels of oil reserves and several million extra barrels of production a day for half a century. It may well be that if they can't find these barrels, it will be of much greater significance to the world than even the non-existent WMD.

If the world weren't facing increasingly obvious and severe difficulties in meeting global oil demand, the spotlight might not be shining so brightly on Saudi Arabia.

But there are many indicators of problems, and those of another secretive organization, Royal Dutch Shell, make an interesting comparison. Shell has seen three reserve write-downs this year, slicing 4.35 billion barrels from its reserves (along with a further reduction of half a billion for last year). It is under financial investigation by the US SEC (Securities & Exchange Commission) and by their UK counterpart, the FSA (Financial Services Authority); and it is being investigated for criminal deception by US Department of Justice over its "lost" reserves, not to mention many law suits from aggrieved investors. And now comes the suggestion that unless it improves its exploration record Shell will "run out of oil in a decade."

No one is suggesting that Saudi Arabia will 'run out' of oil in a decade, but there are rising concerns that they can neither keep producing at the current rate of about 8.5 million barrels a day for more than a few more years, nor find all the 261 billion barrels of recoverable reserves they say they have proved, far less the extra 100 billion barrels of recoverable oil they claim they will discover by 2025.

Finding out what is really going on in Saudi Arabia is very much harder than in Shell, but at an energy conference in Washington, D.C. on 27th April (sponsored by the Center for Strategic and International Studies and the Saudi Business Council), the Saudi oil and finance ministers, the head of the state oil company, Aramco, and some U.S. counterparts, offered a second helping of the new policy of Saudi glasnost, or openness. In fact, the Saudi material, though delivered from almost the highest pulpit, was largely a repeat of the same sermon from two months ago, when two moderately high ranking Aramco officials told the world to trust them and stop worrying. This time we were told once, twice, and thrice again, by Americans as well, that the industrial world has nothing to worry about on the oil front for decades.

That so many high-ranking Saudi and US officials should gather in public to tell us not to worry about the world's biggest oil exporter should be quite worrisome.

The need for questions was underlined all day by a stream of contradictions and a statement from Federal Reserve Chairman Alan Greenspan, who turned attention away from the future of global oil and towards the bleak future of U.S. natural gas.

The scare that drew the Saudis back to Washington began two months ago, when the world's largest private energy banker, Matt Simmons, began loudly voicing his concern about the state of the Saudi oil reserves to the media.

Simmons said then that "the entire world assumes Saudi Arabia can carry everyone's energy needs on its back cheaply. If this turns out to not work, there is no Plan B, and the world will face a giant energy crisis."

The happy tune hummed on Tuesday was that while people have been warning that we will run out of oil since the 1880s, the market has always proved them wrong. In an effort to calm fears, Saudi and American officials joined ranks to get their stories straight. Saudi Petroleum Minister Ali Naimi told the packed house of bankers, diplomats, economists, and media "you can rest assured that our booked reserves are very real" and guaranteed that there would be "no shortage of oil for the next fifty years." He seemed at times insulted that anyone would even question the size of Saudi Arabia's boundless bounty.

U.S. Deputy Energy Secretary Kyle McSlarrow agreed with the Saudis that serious oil difficulties won't begin for another forty or fifty years, though there are "challenges." For instance, he wasn't at all happy about gasoline prices, which he blamed on high oil prices, driven up by the recent OPEC cut in production. Indeed, oil prices have been closer to $40 than $30 per barrel for all of April, when prices should be at their lowest for the year.

The Saudis countered by suggesting that the U.S. could lower gas taxes if it wanted cheaper driving, and they offered a paradoxical reassurance that they were absolutely committed to oil at $25 a barrel, but not any time soon. However, one oil analyst has recently declared that $25 oil is as "dead as a dodo." Just how uncommitted the Saudis are to lower oil prices was later underscored by the Saudi Minister of Finance, Dr. Ibrahim Al-Assaf, who said that they will need to spend billions of dollars on desalination and power plants.

Those billions won't come from exporting sand. Oil export revenues make up more than 90 percent of total Saudi export earnings, about 80 percent of state revenues, and around 40 percent of the country's GDP. Dr. Assaf also said that although Saudi Arabia is seeing 4 percent economic growth, it really needs 8 percent to cope with its growing social problems and exploding population, which at nearly 3.5% is one of the fastest growing in the world. Unemployment is estimated at between 20 and 30%, and is thought to be expanding at up to 100,000 men a year, mostly resentful, unskilled and often illiterate young men, with all that that implies for calls to jihad. The Saudis have made efforts to diversify their economy, but unfortunately much of that effort has been directed towards involvement in petroleum-related products, instead of activities genuinely disconnected from petroleum production.

This has echoes of efforts in previous decades by the petroleum super-majors to become less dependent on oil production. They tended to find that there was no business as profitable as the oil business.

All told, it doesn't take a super-computer to work out where most of Saudi Arabia's new economic growth must come from.

Most interestingly and encouragingly for oil peak aficionados, several speakers, including energy analyst and White House advisor Daniel Yergin, explicitly denied what has come to be termed the "oil peak." The term oil peak refers to the inevitable peak and decline in production of a non-renewable natural resource. U.S. oil peaked in 1970, just three years before the devastating Arab oil embargo. If in 1973 U.S. oil output had had spare capacity, the effects of the embargo would have been much more muted -- perhaps the Persian Gulf producers would not even have tried it.

Now there are growing voices inside and outside the oil industry warning that with world oil discovery having peaked in the 1960s, it has been nearly a quarter century since we found more oil than we used.

They remind us that exactly forty years after US oil discovery peaked in 1930, its production peaked. In other words, the world is now where America was in 1970. Since an unexpected decline in world oil production is generally regarded as a catastrophe, no government or official institution has yet admitted it. Signs of oil peak therefore have to be found indirectly.

Even those who believe that this is the decade that oil will peak and decline had thought that the Middle East, and Saudi Arabia in particular, would be immune for at least another ten to fifteen years.

Now it seems even that shard of confidence might be misplaced.

Cutting No Slack
Whether or not it is true that Saudi oil reserves are 'very real,' the oil minister did say something that no one disputes: that the economic miracle of the 20th century depended on a plentiful supply of cheap oil, and that future stability depends on spare capacity. With light sweet oil having just cleared $39 a barrel, the highest price since Iraq invaded Kuwait in 1990, and supply problems from Venezuela to Nigeria and Iraq and Indonesia, the cheap abundance is already in serious doubt. Where is that spare capacity, that may soon be so badly needed? Nowhere but Saudi Arabia, according to Guy Caruso, head of the U.S. Energy Information Administration, the statistical arm of the Department of Energy. He said that in the entire world there is only two million barrels a day of spare capacity, and that all of that two million is in Saudi Arabia.

In itself, two million barrels a day is far too little slack for a system that needs 80 million barrels a day, and more dangerous still to have it all in one unstable place. Just how unstable has been demonstrated in the last month by a spate of suicide bombings, including in the capital, Riyadh, and, last week, on the very day when the CEO of Saudi Aramco, Abdullah Jumah, was announcing in Washington that "there is nowhere in the world that oil facilities are protected as well as in Saudi Arabia and Saudi Aramco," came a highly explicit threat of new and more ferocious attacks by Al Qaeda. In brazen contrast to the words of the Aramco CEO, Al Qaeda said that "the apostate Saudi government will be incapable of protecting their interests or providing security for them." So it proved. Days later, apparently delivering on their promise, gunmen killed five Western engineers in the petrochemical city of Yanbu, in the western, Red Sea region of Saudi Arabia. This attack has sent shock waves through the Saudi petroleum industry, and along with the coordinated, suicide bombing attempt on an Iraqi oil export terminal at Basra, is one of the overt factors driving oil prices ever higher.

But security concerns, however deadly, are operational matters. What if the Saudi spare production capacity itself is not real? Credible sources have suggested that Saudi Arabia can barely maintain its current output of around 8.5 million barrels a day, and that when it does increase output, it is only briefly and mainly by means of using its strategic reserve, which was only recently created, and may be as large as 70 million barrels. If this is the case, it could indeed maintain a 2-million-barrel-a-day increase in output, but only for a month. Is this what they would use to back the Saudi promise to help Bush win another term, as Bob Woodward recently claimed, in Plan of Attack? The Saudis vigorously denied any such promise, but no one probed them deeply about the exact nature of their spare capacity and great, new projects.

Moving beyond "trust us," closer investigation offers little room for comfort. Most of the great, new projects that they are talking about bringing on, are neither new nor great. "I read the SPE papers about the big projects they have coming up," said Matt Simmons after hearing the names of the fields, "and they're very crappy projects." He noted that one of the fields, Qatif, was discovered nearly 60 years ago. "To say that's one of the greatest fields ever - it is not," he said emphatically. "By 1977 it was such a sorry field that it was converted over to be used as a storage cavern for excess refinery production at RasTanura (the world's largest petroleum port, located in the Eastern region). That's their next on target - to get 500,000 barrels a day. I said, Man alive, if that's the next best thing they have, it tells you an awful lot about all these 64 fields that have never produced."

Indeed, the fact that about only a quarters of Saudi Ariabia's 85 fields have been produced has led to questions as to why they have spent so much effort on mature, or perhaps dying fields like Ghawar, if they have so many other new and better prospects. The calls are beginning, and will only intensify, to allow outside inspectors to come and examine the true state of Saudi oil reserves and capacity. If they are so large, why should the Saudis have any worries about allowing the inspectors in? The parallels with neighboring Iraq may seem fanciful, but it is possible that the Saudis don't want inspectors for the same reason as Saddam didn't - because there is nothing there to find, but maintaining the illusion, and confusion, is vital.

And the confusion is considerable. Amongst the many Saudi analysts poring over every scrap of information that the Saudis divulge, or accidentally leak out, some are now suggesting that when the Saudis say reserves, what they really mean is original oil in place, or OOIP. Alternatively some of their reserve numbers might prove realistic, but only if very high recovery rates were assumed. Recovery rates that could only be achieved over a very extended period at very low rates of oil production and very high rates of water production. If this were to be the case, it could mean that Ghawar, which the Saudis say is 48% depleted, far from having another 50 billion barrels left, may have little more than 5 billion that could be produced at high flow rates. Admittedly this is close to a worst-case scenario. It assumes a lowish, though not unreasonable OOIP of 115 billion barrels for Ghawar, but also a high, though not impossible, recovery rate of 50 to 55%. However, without outside verifiable data, such a situation must at least be contemplated because of the enormous significance of the world's largest oil field. If such a grim forecast were to prove true, with Ghawar providing well over 60% of Saudi oil production, and more than 5% of world production, it would help explain why the Saudis have been calling on other Middle Eastern OPEC countries to increase their output, when they must know very well that they can't. It may be that all of the Middle East is running flat out just to stand still. No wonder Matt Simmons is so concerned.

Interpreting the Oracle, Alan Greenspan
Simmons is not alone in his concern. In his April 27th CSIS comments, Alan Greenspan took a surprisingly skeptical approach, first questioning whether we could be so sure that all was well with oil, by pointing out that six-year long-term futures prices have seen a "dramatic rise." He expressed dismay yet again that too little attention was being paid to these kinds of long-range energy prices, which were ominous indicators of a difficult energy future, which could "alter the magnitude of and manner in which the United States consumes energy."

Greenspan warned that we had spent "more than a century draining the more immediately accessible sources of crude oil," and that much new technology was being devoted to exploring and producing in very harsh physical environments. And unlike the other speakers, he cryptically left the door open for oil peak as being an underlying cause of rising oil prices by saying that the "strength of crude oil prices presumably reflects fears of long-term supply disruptions in the Middle East." He didn't sound very convincing. Then, again, he may be signaling that he is not convinced either by Saudi claims of practically endless oil.

However, there is no doubting that Greenspan sounds both convincing, and really concerned, when he talks about US natural gas. Despite this being a conference about oil, he reserved his strongest remarks for gas.

He pointed out that long range natural gas futures jumped in 2001, and that natural gas is really something to worry about. So much so, Greenspan warned, that in order to get access to the world natural gas markets, America must build a huge new rash of liquefied natural gas terminals, especially offshore (where it is harder to argue that they are a safety hazard). Without immense capital investment, natural gas prices will stay high, and that will hurt the economy.

In fact, Greenspan is saying quite openly, that in the near term, there is no solution to tight natural gas, and this will have broad effects on industry trying to increase jobs, and on a power sector struggling to supply ever more electricity to an economy that must grow fast in this highly political year. He words have been prophetic, he may note with regret. Within a week of his speech, natural gas prices were over six dollars per thousand cubic feet, a historical record for May, when prices should be at their lowest ahead of the re-injection season, when US storage caverns aim to fill up with some 3 trillion cubic feet of gas. To cap his prognosis, San Diego county came close to ordering blackouts this week, thanks to heat and an over-stressed grid system. The week before, California had just been assured that it would escape rolling blackouts this summer.

Andy Weissman, one of the foremost US natural gas analysts, is ready to bet that gas prices will top $8 before the end of June, and possibly even range up to $15 before the summer's end. He said that gas prices will soon be a cause of "profound concern," especially given that oil may also soon be exploring $50 or even higher. Similar worries are just starting to spread in the financial press. An interesting question remains unanswered -Alan Greenspan seems to take US gas decline very seriously. Did he give a hint at CSIS that he thinks the world oil is not far behind, or does he believe the eternal optimists in the DoE and Saudi Arabia, who are still saying "don't worry for fifty years?"

Some economists are predicting that 2004 will see the highest economic growth for a generation, both in the U.S. and in the world. That growth, fueled by ravenous desire for oil by China, and now India, combined with American gas (natural and -oline) problems, seems set to make 2004 a tough year both for energy optimists and for oil and gas, and possibly ruin the rosy forecasts of super growth.

Which brings us back to Saudi Arabia. If it turns out to be playing by the same rules as Shell, now facing threats of criminal investigation for lying about its proven reserves, the whole world really should start asking for some tangible, outside proof that Saudi Arabia is still the king of oil, just to be sure that its much vaunted barrels of oil production haven't gone the same way as Saddam's missing weapon.


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